Reverse factoring and confirming are two financial terms that are often confused in the world of finance. This article on reverse factoring vs confirming will explain the differences between the two and which one is suitable in which situation. Let’s have a look.
What is reverse factoring?
Reverse factoring, also known as supplier financing is a financial agreement between 3 parties – a supplier, a buyer and a factoring company. In this arrangement, the buyer helps the supplier receive early payment for their invoices through the factoring company (which finances the transaction).
Unlike traditional factoring, where the business seeks financing to get paid faster, reverse factoring is initiated by the buyer or the customer. The main goal is to improve cash flow for the business while allowing customers/buyers to maintain or extend payment terms.
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How does reverse factoring work?
- Supplier submits invoice: The business or the supplier delivers goods or services to the customer/buyer and submits an invoice.
- Buyer confirms the invoice: The buyer verifies the invoice, confirming that the goods have been received and the invoice amount is accurate.
- Factoring company pays the supplier: Upon receiving the buyer’s approval, the factoring company pays the supplier the full invoice amount or a significant portion of it (80% to 90%), often within a few days minus a fee.
- Buyer pays the factoring company: The buyer then pays the factoring company the invoice amount on the due date, adhering to the agreed-upon payment terms.
According to a report by Invoice Funding, the number of UK businesses using some form of invoice factoring stands at around 45,000.
What is confirming?
Confirming is a financial service provided by a bank or factoring company that assists companies manage their payments to suppliers more efficiently. In confirming, the buyer authorises a bank to handle the payment of invoices on its behalf, as a result of which the supplier receives early payment.
Confirming is particularly helpful for companies with a large volume of suppliers, as it streamlines the payment process and improves relationships with suppliers by ensuring timely payments.
How does confirming work?
- Supplier submits invoice: The supplier submits an invoice to the buyer for payment.
- Buyer approves the invoice: The buyer reviews and approves the invoice and sends it to the financial institution managing the confirming service.
- Financial institution offers early payment: The financial institution notifies the supplier of the approved invoice and offers the option of early payment. If the supplier opts for early payment, they receive funds minus a discount.
- Buyer pays financial institution: On the invoice due date, the buyer reimburses the financial institution for the full invoice amount. The buyer may incur a fee for the confirming service.
Key differences between reverse factoring and confirming
While both confirming and reverse factoring are aimed at improving the efficiency of payments between the 2 parties (buyer and supplier or customer and business), they differ in their structure, purpose and benefits. Let’s have a look.
1. Initiation of the process:
The process of reverse factoring is initiated by the buyer to provide early payments to suppliers through a financial institution. Confirming is initiated by the buyer as well, but it primarily involves outsourcing the payment management process to the financial institution (bank or factoring company).
2. Main purpose:
Reverse factoring focusses on improving the supplier’s cash flow by offering them early payment, generally in exchange for a discount. It helps them reduce their working capital needs.
But the main purpose of confirming is to streamline the payment process for the buyer by ensuring timely payments to suppliers. While it offers early payment, the primary benefit is operational efficiency for the buyer.
3. Risk management:
Reverse factoring reduces the financial risk for suppliers, as they receive payment regardless of the buyer’s payment cycle. Confirming, however, primarily reduces the operational risk for buyers by outsourcing payments, though it can also benefit suppliers if they choose early payment.
4. Usage:
Reverse factoring is usually employed by large companies with numerous small suppliers to strengthen the supply chain, while confirming is mainly used by companies with complex supply chains to manage the payment process with more efficiency.
Summary: Reverse factoring vs confirming
| Aspect | Reverse factoring | Confirming |
|---|---|---|
|
Debt on the balance sheet |
Adds debt to the balance sheet, which affects creditworthiness.
|
No debt is added; factoring is a sale of an asset.
|
|
Approval process |
Lengthy approval process which requires a strong credit history.
|
Faster approval, mainly based on the creditworthiness of the business’s clients.
|
|
Repayment obligation |
Fixed repayment schedule that must be followed regardless of cash flow fluctuations.
|
No repayment obligation; funds are received upfront and the invoice is settled when the client pays.
|
|
Collateral requirement |
Often requires significant collateral such as property.
|
No traditional collateral required.
|
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FAQs
Some of the cons of reverse factoring include cost, as it can be expensive due to fees charged by the factoring company; dependancy, as suppliers become reliant on early payments; and complexity, as it can be difficult to manage multiple agreements between parties.
In reverse factoring, the seller typically pays the interest or fees associated with the early payment provided to the supplier. However, the arrangement can vary as well, and in some cases, the buyer may bear a portion of the cost.
No, reverse factoring and confirming are not the same. Reverse factoring focuses on providing early payment to suppliers and is used to improve cash flow. Confirming, on the other hand, is a service where the buyer outsources the payment management to a financial institution, giving suppliers the option to receive early payments.
